Investors often purchase real estate in the hopes of increasing its value and generating ongoing returns. When deciding which property to buy, it’s important to compare projected returns on these assets. One way to do this is by calculating the internal rate of return (IRR). However, this method does not account for reinvestment or cost of capital over a given hold period. Two other approaches that may provide better insight into projected returns are capital accumulation and modified internal rate of return (MIRR).
Capital accumulation tracks an asset’s value increase while an investor owns a particular real estate property by subtracting the amount invested from its current value at a specific point in time; results are presented as dollars. MIRR considers anticipated growth rates and cost of capital rates, reporting them as percentages using this formula: (positive cash flows x cost of capital)/(initial outlays x financing costs).
Incorporating both methods when determining investment strategies can give investors greater insight than just IRR calculation alone when making decisions about which investments to purchase.
